Deal focus: KKR's Vietnam macro proxy - update

The deal

A consortium led by KKR that also featured Temasek Holdings acquired a 6.12% stake in Vinhomes, Vietnam’s leading integrated real estate developer, for VND15.1 trillion ($650.7 million) in June. The consortium purchased 201.3 million shares for VND74,900 per share.

Vietnam conglomerate Vingroup, which held a 73.66% interest in Vinhomes as of March 31, remains the largest shareholder. Vingroup was advised by Credit Suisse and Latham & Watkins. Allen & Overy and Simpson Thacher & Bartlett were the buy-side legal advisors, according to Mergermarket data. 

The players

KKR committed capital to the deal from its third pan-Asian private equity fund, which closed at $9.3 billion in 2017. In Southeast Asia, KKR follows a strategy of working with established counterparties, often across multiple transactions. Prior to this transaction, it had invested more than $600 million – more than any other global private equity firm at that time – in three different entities over the course of eight years in Vietnam. All were controlled by the same parent group.

KKR’s first foray into the country came in 2011 with a $200 million commitment to Masan Consumer Corporation. Two years later, the company received a further $159 million, and KKR exited in 2016. In 2017, the private equity firm invested $100 million in Masan Group and $150 million in one of its subsidiaries, integrated meat supplier Masan MeatLife Corporation.

C.K. Yan, a director on KKR’s private equity team, told AVCJ in an earlier interview that a similar, extended partnership with Vingroup was desirable. “It’s a template for the journey and we hope to replicate it,” he said. 

Temasek, an investment fund controlled by the Singapore government, had a portfolio of S$313 billion ($226 billion) as of March 2019 with a 14% allocation to Asia, excluding Singapore and China.

The asset

Founded as the residential development unit of Vingroup, Vinhomes was spun-off as an independent entity in 2018. It raised $1.35 billion through an initial public offering – the largest ever seen in Vietnam – the same year, selling 10% of its shares for VND114,700 per share. Singapore’s GIC Private invested prior to the offering, paying $853 million for an approximate 7% interest.

Vinhomes had a 22% share of Vietnam’s residential market across all segments as of March 2020 and a 46% share in the mid-end segment, as disclosed by the company. The company has a land bank of 16,500 hectares – 20 times larger than that of its next largest competitor Novaland and sufficient for 15 years of development. Almost all Vinhomes’ revenue comes from residential property sales, but it is trying to develop recurring income streams through commercial and industrial leasing.

The company has developed projects in 40 cities in Vietnam. It sold 60,100 units in 2019, up 296% year-on-year. Revenue came to VND51.6 trillion in 2019, up from VND38.7 trillion a year earlier, while net profit rose 51.7% to VND21.7 trillion.

KKR was impressed by Vinhomes’ execution capabilities. The company launched three mega projects in 2018 and 2019 – Vinhomes Ocean Park, Vinhomes Smart City and Vinhomes Grand Park – each of which has around 45,000 units. Future residential developments are likely to be more mass-market in nature, but it is not just about the properties themselves. “It’s their ability to build entire ecosystems around these developments – schools, hospitals, infrastructure, and malls,” Yan said. “ This really helps cities urbanize.”

KKR started tracking Vinhomes prior to its 2018 IPO and participated in the annual investor tour last year, according to the director. Previous engagement with the management team plus final due diligence checks completed by third-party on-the-ground resources made KKR comfortable enough to push ahead with the transaction despite the international travel restrictions imposed due to COVID-19.

The industry 

Strong demographic fundamentals, including continued rapid urbanization and a rapidly emerging middle class, are the key pillars for the positive outlook of the industry, Vietnam-based sector bankers and investors said.

The Vingroup deal is viewed as a demonstration of investor confidence in the sector, but multiple financial investors warned that it is not necessarily a harbinger for more transactions. They see it more as a reflection of Vinhomes’ strengths. The company stands out among its peers because of its large land bank and robust governance, a sector banker noted.

Despite the attractions of Vietnam’s real estate sector, many foreign investors still regard it as too much of a risk. Acquiring shares in listed local developers – rather than investing in projects directly – is one way of addressing this. Foreign investors are afraid of being cheated by local developers in a market where they have no means of recourse because the legal enforcement is lacking, an industry executive and a second banker said. There are also concerns about illegal or improper behavior by local developers.

Quality of governance at the company level will be a key consideration in future deals, the bankers noted. More emphasis should be placed on making the sector more transparent and accessible for foreign investors.

Vinhomes’ smaller peers include Novaland, Nam Long Group, Dat Xanh Group, and Khang Dien, the bankers said.   

The strategy

Given KKR has acquired a minority interest in a public company, its scope for operational influence will be limited – to the point that the investment is almost passive in nature, the sector investors said. 

If the investment is essentially a macro play, then infrastructure might be as important as residential real estate, they noted.

Broken down by gross floor area for sale, 47% of the company’s land bank was in Quang Ninh, a coastal province adjacent to China, as of March. Vinhomes expects the area to be a key beneficiary of infrastructure developments, according to a July corporate presentation. This is linked to expectations that multinationals will diversify their supply chains and shift production from China to Southeast Asia.

Yan said that Vinhomes could be a long-term beneficiary of these supply-chain disruptions: "What makes Vinhomes special is its ability to secure strategic land bank and I think the same can happen with industrial real estate."

From a Temasek perspective, the deal could facilitate bulk sales of land bank to developers with ties to the Singapore-based investors, the industry executive and the bankers said.  According to local media reports, Vinhomes aims to make 30%-35% of its revenue this year through bulk sales of units in its large-scale projects to sub-developers.

Collaboration with developers in the Temasek ecosystem could also extend to industrial real estate, the second banker added. Temasek is an investor in the likes of CapitaLand, Ascendas, Keppel Corporation, and Mapletree, each of which has exposure to industrial projects.

Vinhomes and Temasek declined to comment.

This is part of a series of deal focus stories produced by AVCJ and sister title Mergermarket.

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• Topics
• Southeast Asia
• PIPEs
• Real estate
• Infrastructure
• KKR
• Temasek Holdings
• Vietnam